The market will always trade fear before fact and that was the case in the soybean market this week especially in soy meal. Tightness concerns for meal due to ongoing weather issues in Argentina have rallied July soymeal futures over 44 percent in the last month. End users have been caught short bought on a global basis and a continued slow harvest advance in Argentina has funds, speculators, and commercials buying old crop futures particularly July beans and meal while extending rallies in the July16/Nov16 bean spread and the July16/Sep16 meal spread. A flood of data was released after Thursday’s close which put Argentina’s corn harvest at 28 percent complete versus the 38 percent last year. The soybean harvest came in at a woeful 61 percent versus 88 percent last year. The rally in Chinese meal has spilled into the US soy complex market. Dalian meal last week may have seen a near term top and whether new highs will be scored will be important to price direction through the rest of the month. Firm South American corn premiums could also support grains in the near term. Other bullish news in meal include that supplies of distillers’ grains, or DDGs, the high protein feed ingredient manufactured as a byproduct of ethanol output, have apparently not been so plentiful. Certainly, such talk is being used as one cause of the strength of soymeal, a rival to DDGs in the feed mix, and that feeders are shifting back to meal.
With all this bullish news it’s important to remember that nothing goes up or down forever. Soy meal on the charts looks completely over bought and a more conservative way to play this to capture potential profit taking is to short the July 16/September 16 Soy meal futures spread. This spread has traded higher for seven straight weeks and currently on the weekly chart has an RSI of 93.58. (See Chart) This indicates a severely overbought market and when the music stops I look for this market to see a significant retracement. Therefore I propose selling the July/Sep 16 meal spread at 20.0 or better July over. Look for a retracement back to 25 cents over July, or 12 points lower as a spread. If filled this would gross a profit of $1200.00 minus commissions and fees. Use appropriate stops given risk tolerance and account size.
For those interested I hold a weekly grain webinar each Thursday at 3pm. It is free for anyone who wants to sign up and link for sign up is below. If you cannot attend live a recording will be sent to your email upon signup.
